States may lose Rs 120 bn in share of central taxes over road & infra cess

While the excise duty on petrol and diesel remains effectively unchanged after the Budget, the shift of Rs 2 per litre from basic excise duty to road and infrastructure cess would reduce the share of tax revenue transfers to states by about Rs 120 billion (see chart 1). This, despite the fact that excise revenues have broadly been kept unchanged.

Finance minister Arun Jaitley introduced a new ‘road and infrastructure cess’ of Rs 8 per litre on petrol and diesel, replacing the older road cess of Rs 6 a litre (known as additional excise duty), and reducing the basic excise duty on both fuels by Rs 2 per litre, thereby keeping taxes constant for consumers (see chart 2).

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The road and infrastructure cess will add the same amount to the union revenue in the upcoming financial year, but as a cess now, keeping union revenues from petrol and diesel unchanged (see chart 3). According to our calculations, this shift would reduce the revenues from basic excise duties, which is a non-cess revenue, to the tune of Rs 280 billion in 2018-19.

States in total would have received about Rs 120 billion, or 42 per cent of Rs 280 billion, had the basic excise duty not given way to a cess.

In terms of devolution of states’ share from the Centre, as against a revised estimate of Rs 6.7 trillion in 2017-18, states are slated to receive Rs 7.9 trillion in 2018-19.

On the other hand, the Centre hopes to earn Rs 2.4 trillion just from various excise duties on petrol, diesel and other fuels, of which Rs 1.13 trillion is expected to arrive from the road and infrastructure cess.

Basic excise duty forms a part of the divisible pool of the union’s tax revenue, from which 42 per cent of resources are shared with the states. Additional excise duties (previously road cess and now, road and infrastructure cess) are a cess while special additional excise duties are a surcharge.

This loss that the states will suffer becomes evident when one considers that the effective tax rates on the fuels have remained unchanged, but the share of the states stands depleted.

States’ share in the divisible tax pool rose from to 32 per cent to 42 per cent post financial year 2015-16. The divisible pool consists of all tax revenue collected by the Central Government, except those classified as surcharges and cesses levied for specific purposes and collection charges.

India’s consumption of petrol is rising at a higher rate than that of diesel, though diesel consumption is generally four times that of petrol (see chart 4).

India consumed about 19.5 million metric tonnes of petrol and 60.5 million metric tonnes of diesel between April 1, 2017 and December 31, 2017, that is, during the first nine months of the financial year 2017-18. Extrapolating these numbers to the entire financial year yields an annual consumption of 26 million metric tonnes of petrol and 80 million metric tonnes of diesel.

Assumption of a growth of 5 per cent gives a consumption estimate of 27.3 million tonnes for petrol and 84.7 million tonnes for diesel in 2018-19. Conversion from tonnes to litres has been done using proper conversion factors (essentially derived from the density) of petrol and diesel separately.

The Centre expects to collect a staggering Rs 3.02 trillion from cess and surcharges in 2018-19. This is about 8.5 per cent more than the Rs 2.78 trillion it mopped up in 2017-18, according to revised estimates.

The National Democratic Alliance government introduced and levied Swachh Bharat cess, KrishiKalyan cess, infrastructure cess as indirect taxes among others in its tenure till the introduction of goods and services tax, while the cess on crude oil still remains.

The union budget has assumed the average Indian basket oil price to be $65 per barrel in 2018-19. The average price in January touched $67 per barrel.